Gogo Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. Gogo provides in-flight connectivity, entertainment and related equipment through Commercial Aviation North America (CA-NA), Commercial Aviation Rest of World (CA-ROW) and Business Aviation (BA).
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $165.4 million | $141.7 million |
| Operating loss | $14.7 million | $8.6 million |
| Net loss | $41.4 million | $24.1 million |
| Adjusted EBITDA (non-GAAP) | $10.7 million | $14.5 million |
| Cash used in operating activities | $14.0 million | $2.4 million |
| Capital expenditures | $71.6 million | $37.4 million |
- Service revenue rose 23.4% to $146.5 million; equipment revenue fell 17.9% to $18.9 million. Total revenue increased 16.7%.
- CA-NA revenue grew 13.5% to $98.8 million, and BA revenue grew 12.4% to $56.3 million. CA-ROW revenue more than doubled to $10.3 million, but its segment loss widened to $26.6 million. Segment profit was $11.2 million for CA-NA and $26.1 million for BA.
- Engineering, design and development expense increased 67.5% to $36.3 million, including $9.4 million for completion of the first phase of next-generation ATG development. Depreciation and amortization rose 25.0% to $30.4 million.
- Interest expense increased 65.3% to $26.9 million, contributing to the larger net loss. Cash paid for interest was $42.7 million.
- At March 31, cash and cash equivalents were $105.9 million and short-term investments were $333.3 million, totaling $439.2 million, down from $455.8 million at year-end 2016. Total assets were $1.27 billion; stockholders’ deficit was $76.6 million.
- Debt carrying value was $875.2 million, net of financing costs and discounts. Outstanding principal was $590.0 million on the 12.5% senior secured notes and $361.9 million on the 3.75% convertible notes. The notes’ stated maturities are 2022 and 2020, respectively.
Material changes versus the prior comparable period
- Revenue growth was led by connectivity and other service revenue; equipment revenue declined. CA-NA connectivity take rate rose to 8.3% from 6.5%, while revenue per session fell to $11.17 from $13.05, reflecting product mix and promotional activity.
- BA service revenue increased with more ATG subscribers and higher service revenue per aircraft; BA equipment revenue declined amid weaker market trends. CA-ROW growth partly reflected an airline’s election that changed an agreement’s equipment accounting from an operating lease to a sale.
- Cash used in operations increased to $14.0 million, partly due to interest payments on the senior secured notes. Capital spending rose substantially, primarily for airborne equipment and, to a lesser extent, capitalized software.
- In January 2017, Gogo issued $65 million principal amount of additional senior secured notes at 108% of face value, raising $70.2 million gross.
Outlook, risks and unusual items
- Management said available cash, cash equivalents and short-term investments were expected to fund working-capital and capital-expenditure needs for at least the next 12 months, while noting uncertainty around future operating cash generation, financing access and spending needs.
- 2017 capital expenditures were forecast at $290–$330 million, or $230–$260 million net of estimated $60–$70 million deferred airborne lease incentives. For 2018, management forecast $110–$170 million of capital expenditures, or $70–$120 million net of estimated $40–$50 million incentives.
- Management expected interest expense to increase in 2017 versus 2016 due to higher average debt and interest rates. It also expected higher service costs as networks expand, and higher engineering and development spending as technology and international plans proceed; several expense categories were expected to decline as a percentage of revenue over time.
- Approximately $5.7 million of BA equipment revenue was deferred under a free-upgrade program, with recognition expected upon shipment of replacement equipment or expiration of the program on December 31, 2017. A separate airline agreement requires $1.8 million cash rebates in June 2017 and June 2018.
- Commitments include satellite transponder and teleport services of approximately $55.0 million for April–December 2017, with further multiyear commitments disclosed in the filing. The senior secured notes impose debt, distribution, lien and other covenants. Management identified risks including technology deployment and certification delays, reliance on suppliers and airline partners, competition, international expansion, significant indebtedness, and possible restrictions on passenger devices following security threats.
- The filing provides no specific revenue, earnings or profitability guidance. Management cautioned that quarterly results may be seasonal and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether operating cash flow and available liquidity can support the forecast capital program, debt service and technology deployments, and whether financing remains accessible within debt covenants.
- Execution, cost and timing of 2Ku and next-generation ATG deployments, including the planned ATG network buildout and certification requirements.
- Whether CA-ROW can improve profitability as it grows, given its widening segment loss and rising service costs.
- How much reported growth reflects recurring usage and customer adoption versus promotions, airline-paid arrangements and changes in equipment accounting.
- Exposure to major airline relationships: Delta and American together accounted for approximately 48% of consolidated revenue in Q1 2017; confirm the sustainability and terms of those relationships.